Measurement Of Capital Flight

Published Date: 02 Nov 2017

Chapter 2

Literature Review

2.1 Introduction

Since the debt crisis in the early 1980’s, there has been copious literature devoted on the outflows of resident’s capital in response to changes in domestic policies and political instability. This phenomenon of huge capital outflows was termed as "capital flight". With time, capital flight became to be regarded as an indicator of a country’s economic situation.

The aim of this chapter is to have an overview of relevant literature on capital flight. The chapter is divided into two main parts, as follows:-

Theoretical aspect

Empirical aspect.

2.2 Theoretical aspect

This section looks at the various definitions of capital flight, its determinants and the possible methods for measuring its magnitude.

2.2.1 Definition of capital flight

It is worth pointing out that there is ample controversy on the definitions of capital flight. While some analysts view capital flight as a normal capital outflow, others consider it as an abnormal capital outflow. In general, capital outflow from developed countries is regarded as foreign investment while the same activity is referred to as capital flight when undertaken by developing countries (Ajayi 1995, p.3).

One possible explanation for this dichotomy is the belief that investors from developed economies are seen as responding to opportunities abroad while investors from developing economies are said to be escaping the high risk perceived at home. It cannot be denied that usually investors, whether from developed or developing economies, base their decisions on the relative risk and return at home and abroad. Therefore, investors around the world are rational and will thus search for better risk-return trade-off and portfolio diversification.

Capital flight is referred as "the reported and unreported acquisition of foreign assets by the non-bank private sector and elements of the public sector" by Morgan Guaranty Trust Company (1986 cited Ajayi 1995). Nowadays, capital flight can be viewed as an illegal transaction in situations where traders falsify their trade documents in order to keep their capital abroad (Schneider 2001, p.9). By doing so, they generate capital flight through export under invoicing and import over invoicing.

For others, capital flight is the non reporting of income earned from claims on non residents, in the balance of payment system in order to escape the control of the home government (Dooley and kletzer 1994, p.5-6).

Short term private capital outflow is also regarded as capital flight. The latter absorbs hot money that responds to political and financial crisis, heavier taxes, potential tightening of capital control, considerable devaluation of domestic currency and actual or forthcoming hyperinflation (Cuddington 1986 cited Machochekanwa 2007, p.9). This interpretation is also found in Schneider (2003, p.1) who argues that capital flight is the flow of residents capital from domestic country to another due to political and economic risk.

It can be seen from the above that there are numerous definitions of capital flight. Nowadays, with the increased globalization, the financial markets are more conducive to the movement of capital thus causing the phenomenon of "capital flight". Nevertheless, it is generally accepted that capital flight represents the outflow of capital from domestic financial market in order to evade losses.

2.2.2 Measurement of capital flight

Numerous definitions of capital flight as seen in the previous section, give rise to different methods to measure this phenomenon in respect of data availability and the methodology used by different countries. The following measures are found in the literature: the residual method; the Dooley method; the hot money method; the trade misinvoicing method and the asset method (Claessens and Naudé 1993, p.2).

Residual Method

This is the principal measure of capital flight proposed by the World Bank in 1985. The residual measure, also known as the broad measure is an indirect approach to estimate capital flight. Outflow of capital is equal to the differences between sources of funds (that is, net increases in external debt and net inflow of foreign investment) and the actual usage of these funds (that is, the current account deficit and additions to foreign reserves).

Algebraically, capital flight is expressed as follows:

KFr = (ΔED + FDI) – (CAD + ΔFR)

Where:

KFr stands for capital flight, ΔED is the change in the stock of gross external debt, FDI is the net foreign investment inflows, CAD is the current account deficit and ΔFR represents the change in the stock of official foreign reserves.

The above approach is changed slightly by Morgan Guaranty Trust (1986 cited Claessens and Naudé 1993). The change in short term foreign assets of the domestic banking system (ΔB) is taken into consideration. This additional item is deducted from the residual method (KFr), showing that the banking system has nothing to do with capital flight as shown below:

KFr = ΔED + FDI – (CAD + ΔFR) – ΔB

Dooley Method

The Dooley method seeks to separate the legal and illegal capital flows. Hence, under the Dooley method, capital flight is equal to that amount of income from foreign assets which are not reported to home country. Following Hermes et al (2002, p. 4), according to the Dooley method capital flight is calculated as shown below:

TKO = FB + FDI – (CAD + ΔFR) – EO – ΔWBIMF

Where:

TKO is the total capital outflows, FB is the foreign borrowing as reported in the BOP statistics, EO is net errors and omission and ΔWBIMF shows the difference between the change in the stock of external debt reported by the World Bank and foreign borrowing reported in the BOP statistics published by the IMF.

The stock of external assets related to reported interest earnings is:

ES = INTEAR/ rus

Where:

ES is the external assets, rus is the US deposit rate (assumed to be a representative of international market’s interest rate) and INTEAR shows the reported interest earnings.

Thus, capital flight according to this method is measured as:

KFr = TKO – ΔES

Hot money method

The hot money method is also referred as the narrow measure of capital flight. According to this method, capital flight represents the short term movement of capital of the non bank public sector plus the errors and omission from the BOP (Cuddington 1986 cited Makochekanwa 2007). One criticism about this method found in the literature is that the hot money method focuses only on the short term outflows of capital. Thus, capital flight is often underestimated. It is calculated as:

KFr = SKO + EO

Where:

SKO is short term capital outflow of the private sector and EO is the errors and omission.

Trade Misinvoicing Method

Capital can move from one country to another illegally through trade. This can be calculated by taking data from both the importing and exporting countries. Therefore, capital flight arises when there are export underinvoicing and import overinvoicing (Claessens and Naude 1993, p.8). This can be illustrated as follows:

Export underinvoicing = (Mw/CIFFOB) -Xc

Import overinvoicing = (Mc/CIFFOB) - Xw

Where, Mw: World’s import from that country

Xc: Country’s export to the world

Mc: Country’s import from the world

Xw: World’s export to that country

It is important to note that the import reported by the country and the import as reported by the world should be on a comparable basis. So, they need to be adjusted by a country specific CIF/FOB ratio. A positive sign indicates capital flight while a negative sign shows capital inflow. The net effect of misinvoicing is the capital flight.

Asset method

The stock of assets which are held in foreign banks by non bank residents of domestic country is referred to as capital flight. This is the so-called asset method (Hermes and Lensink 1992, p.517). However, given that there exist several forms in which assets can be held, this method measures only part of the capital outflows (Hermes et al 2002). Therefore, this method is too restricted in measuring capital flight.

It can be seen from the above that there are different methods to estimate capital flight. Different authors have in fact tried to measure capital flight by adding new variables to the equation and compare the new result obtained to the previous one.

2.2.3 Determinants of capital flight

Normally, individuals are regarded in most cases as being risk-averse, that is, they prefer a sure investment income. They try to avoid risks and losses as far as possible by diversifying their wealth in order to maximize their asset returns. Thus, there is a direct relationship between the behavior of a risk-averse individual and capital flight. It can be found that decision on whether to move or hold capital abroad is based on the amount of wealth, the relative risk and uncertainty and the relative rates and returns of asset (Hermes et al 2002).

Capital flight is generated by either economic factors or non economic factors. Economic factors for instance consist of exchange rate, inflation, foreign borrowing, fiscal deficit, foreign direct investment (FDI) and capital outflows whereas non-economic factors can be corruption and political instability. These factors are discussed below:-

Economic Growth

An indicator of the macroeconomic environment which determines capital flight is the growth rate of the economy. Economic growth usually triggers the presence of investment opportunities in the local economy. Thus, low economic growth or recession may indicates low return on domestic assets and therefore encourage capital to flow out of the home country.

Exchange Rate

It is often found that one of the determinants of capital flight is exchange rate overvaluation. An overvalued exchanged rate means that economic agents would predict depreciation in the near future. Incipient depreciation would make foreign goods to appear more expensive than domestic one. Thus, in order to avoid future losses, residents will opt to hold their assets abroad which generate capital flight (Ajayi 1995, p.16).

Inflation

High level of inflation can also trigger capital outflows. Firstly, high inflation implies that the value of domestic assets will be eroded which provide incentive for residents to hold their assets abroad. Secondly, high inflation is closely attached to exchange rate such that it increases the expectation of future depreciation (Hermes et al 2002).

External debt

Several studies have shown that there is a positive relationship between external debt and capital flight. External borrowing usually reflects that an economy is not doing well or the investment climate of the country is not favorable which explain capital outflows. It is shown by Beja (2006, p.10) that there is a direct linkage between external debt and capital flight. External borrowings are often used to finance capital outflows. In some cases, the transactions are only made through the financial institutions and may not even enter the home country. However, it can also be that these capital flights stimulate more external borrowings.

More often than not, government passes the burden of the external debt on the public through the imposition of high tax. In turn, the domestic residents try to avoid such taxes by placing their capital outside the country which leads to capital flight (Gulati 1988). Moreover, it is observed by Eaton (1987, p.4) that government based-guaranteed debt stimulate further capital flight. Assuming that foreign borrowings are used to finance capital outflow, nationalization of private debt implies that if one borrower fails to repay its debt, government will raise the tax burden on other borrowers. Consequently, other borrowers too will be motivated to flee the tax obligation by investing abroad.

Fiscal deficit

It can be found that in period of fiscal crisis, government usually seeks the help of foreign countries through foreign borrowing. Likewise, in this situation insolvency and default risk are likely to increase which induce capital flight (Ize and Ortiz 1987, p.312). Furthermore, if fiscal deficit is financed through the injection of more money in the economy, this can generate inflationary pressure which in turn erodes the monetary balances. As a consequence, residents will shift from domestic to foreign assets in order to avoid the inflationary tax. On the other hand, if fiscal deficit is financed through bonds sales, the effect will be the same as printing money. However, it will be in the form of higher tax liabilities (Ajayi 1995).

Foreign Direct Investment (FDI)

There exists an ambiguous relationship between the outflow of capital and FDI. From the investment climate perspective, capital flight is subject to the rate of return differential of assets between the home and foreign countries after adjusting for exchange rate. For instance, if the investment climate is favorable, i.e. the rate of return is higher at home as opposed to the foreign country, FDI increases and capital flight is expected to reduce, thus implying a negative relationship.

Alternatively, the discriminatory treatment perspective states that usually host countries provide incentives to nonresident investors such as differential taxation, investment or exchange rate guarantees which are not imparted to the domestic residents. Hence, if FDI is the outcome of those preferential treatments given to non residents, this will generate capital flight. Therefore, from the discriminatory treatment point of view, a positive relationship between outflow of capital and FDI can be established.

Political instability

The influence of weak political bodies on economic institutions can cause distortions and instabilities. This can be a reason for capital flight. The high perceived risks and uncertainty in the public sector causes residents to lose confidence in domestic economy as they may expect an erosion of their future assets. As a result, domestic residents may choose to hold their wealth outside the country (Hermes et al 2002, p.9). Some of the factors which can lead to instability are financial repression (artificially low interest rate), threat of expropriation, perceived policy reversal and default of government obligation.

It is shown by Ndikumana and Boyce (2008) that high level of corruption reflecting a ‘sick’ economy can encourage capital flight. As stated earlier in this paper, one of the definitions of capital flight includes the view that it is an illegal transaction. Therefore, corruption facilitates the acquisition of those illegal assets. Generally, representatives of the government are implicated in such transactions thereby inducing private agents to do so.

Capital outflow

Capital flight can by itself be a determinant of further capital flight as pointed out in the literature. According to Ndikumana and Boyce (2002 p. 6), countries with high capital outflow are expected to have a high level of capital flight in the future. In most cases, capital flight is associated with a worsening macroeconomic environment where investment is not favorable which in turn leads to further capital outflows. In addition, the presence of capital flight forces government to increase the tax liabilities on domestic residents. As a result, the low returns derived after the tax adjustment discourages private agents to invest and motivate them to look for higher return abroad (Collier at al 2001, p.63).

2.3 Empirical Aspect

Over the years, there have been extensive researches which have tried to shed light on factors affecting capital flight. This section therefore points out the empirical results of some studies carried out on the determinants of capital flight in different countries.

2.3.1 Determinants of capital flight

Although there had been massive determinants of capital flight, mainly because of differences in its measurement and differences in econometric techniques and specifications, some factors have become more obvious as its determinants. The key results from a selection of 17 studies on developing nations have been reviewed as shown in Table-A1. Further empirical evidences on the most common determinants of capital flight, as per the table, are highlighted.

Macroeconomic Stability

In general, an inverse relationship is expected between capital flight and the growth rates of an economy. This is because when an economy is doing well, the investment opportunities are expected to be positive. An endeavor was carried out by Alam and Quazi (2003), who used the ARDL procedure to investigate on the above relationship for the period 1973-99 in Bangladesh.

The study showed that capital flight in Bangladesh was caused partly by the lower real GDP growth rate.

However, it was found in another study by Murinde et al (1996) as opposed to the above, that economic growth (lagged) in Cote d’Ivore, Uganda and Nigeria has a positive effect on capital flight. Reasons behind this positive relationship might be that capital move out of a country when economic growth is not significant. It might also be possible that short term economic growth triggers more capital flight in the country in long run.

Exchange Rate

The degree of overvaluation of the Latin America currency was positively related to capital flight. Taking the case of Mexico, Pastor (1989) found that by decreasing the real exchange rate index by 1 % capital flight fell by $68 millions in 1985. One reason why capital fled Mexico is because the Mexican feared that their assets would be eroded in the future due to devaluation of their currency. In the same perspective, in another study, using the ordinary least squared (OLS) technique, Ayadi (2008) examined the determinants of capital flight in Nigeria. The result suggests that exchange rate devaluation significantly explains capital flight in the short run as well as in the long run.

Inflation

An investigation was carried out by Victor (2007) on a panel data of 77 countries from 1971 to 2000 in order to test whether post-war inflation increases annual capital flight. Using different methods of measuring capital flight and many econometric estimation techniques, evidence suggest that 1% increase in inflation is accompanied by 0.005% to 0.01 % of GDP increase in capital flight.

In order to examine the impact of inflation on capital flight, Dooley (1988) used a pooled regression on five Latin American countries and Philippines for the period 1976-83. And the result is consistent with theoretical expectations, that is, a high inflation rate generates capital flight. It was found that a 1 % increase in inflation leads to 23.10 % increase in capital outflow. It is worth pointing out here that inflation is referred to as ‘inflationary tax’ as the authorities has resorted in the creation of money.

External Debt

A study by Ndikumana and Boyce (2008) shows that external debts encourage capital flight. Firstly, OLS estimation was used followed by adding country specific effects and lastly by taking into account change in debt as endogenous. The results show a statistically and economically positive relationship between external borrowing and capital flight. It was found that between 1970 and 2004, 62 cents out of each dollar borrowed abroad has left sub-Saharan Africa in the form of capital flight.

Earlier empirical evidence by Ndikumana and Boyce (2003) approved the above statement. An econometric analysis was carried from 30 sub-Saharan Africa countries for the period 1970 to 1996. The result showed that 80 cents out of each dollar of external borrowing escape the countries in terms of capital outflow in the same year.

The relationship between capital flight and external debt can be further supported by Henry (1996), who sought to find the causes of Jamaican capital flight. According to the result, Jamaican capital outflow was generated both by external debt and the economic circumstances due to these external debts. Evidences also showed that for every one dollar of external borrowing, 66 cents escape the country in term of capital flight in the same year and a further 33 cents flow out after two years.

Foreign Direct Investment (FDI)

A study was carried out by Kant (1996) to analyze the relationship that exists between capital flight and FDI. The latter employed the contemporaneous-correlation and principle component analysis to estimate the above relationship. Results suggest that capital flight computed under the Cline, Dooley and Hot Money methods are negatively related to FDI. It was deduced that capital flight was not caused by preferential treatment but instead by the general economic mismanagement and inefficiencies.

Political and Social instability

A research was done by Hermes et al (2000) where they made use of dummy variables to evaluate problems attached to political instability such as the number of assassination and revolutions per year and indexes of political rights and civil liberties. It can be concluded from the empirical analysis- using the robustness test put forward by Sala-i-Martin (1997 cited in Hermes e al) - that political instability or risk do engender capital flight.

In South Korea during the mid 1980s and early 1990s, the country had undergone political turmoil and during that period capital fled the country considerably. From 1976 to 1991, the average capital flight was around 1.92 % of GDP yearly. However, in 1987 when political unrest was at its peak, it was noticed that capital flight reached 6.6% of GDP (Le and Zak 2001).

Similarly to South Korea, factors affecting Argentina’s capital outflow was associated to political instability. During these days no particular attention was given to the economic situation of the country and the latter exacerbate such that there was massive capital outflow. Results suggest that between 1976 and 1991, Argentina’s capital flight averaged 3.4 % of GDP yearly but peaking at 10% of GDP in 1989 when severity program was put in place which caused political instability (Le and Zak 2001).

Moreover, a study was undertaken in Bangladesh on the determinants of capital flight over the 1973-99 periods, employing the ARDL approach. The result suggests that political disturbances had a positive and significant impact on capital flight both in the short run and long run (Alam and Quazi 2003).

Besides, social instability and capital flight are seen to be positively linked. Social unrest motivates residents to hold their capital abroad as the latter lose confidence in the domestic economy. The fact that social instability is difficult to measure; the level of unemployment is thus used as a proxy. The level of unemployment was found to be significant in explaining capital flight in Trinidad and Tobago for the period 1971-87 (Henry 1996).

All the above determinants have, indeed, either a positive or negative effect on capital flight. It has been noted, however, that the impact might not be the same in all countries due to difference in political, social and macroeconomic environment. This study will therefore analyze the effect of some of the determinants stated above on capital flight in the Mauritian economy.

2.2.4 Link between capital flight and growth

The negative impact of capital flight on growth has been established by much research. Theoretically, capital flight implies a reduction in the level of domestic investment which reduces the capital labor ratio. Consequently, labor productivity falls and this in turn reduces the level of output produced. This view is supported by Pastor (1989, p.11), who states that capital outflow reduces the required domestic investment and as a result prevents further economic development.

Capital flight may also affect growth through various channels. Some are given below:

If capital flight is financed by a country’s scarce foreign exchange, it is obvious that there will not be enough available to finance import. Furthermore, import may be crucial for economic growth (Lessard and Williamson 1987 cited Pastor 1989). On the other hand, capital flight can be invested in the production of exported goods which would generate foreign exchange to finance import.

As explained above, the positive relationship between external debt and capital flight does not contribute to a country’s growth. In most cases, increase in external debt does not enhance the economic condition of a country; instead it exacerbates the situation.

Erosion of the domestic tax base holds back growth in an economy. Usually, capital flight takes away both the incomes and stock of wealth from an economy. Therefore, the government has less revenue through tax because of the reduction in taxable assets and income. This implies that the domestic authorities have less capital to inject in the economy thus delaying growth.

Capital flight has a negative impact on the economy especially during periods of crisis and uncertainty. It is found that, rising capital flight hinder the economic growth. This induces further capital outflows. As a result, the domestic country can not only be deprived of foreign borrowings but also from economic growth (Beja 2006, p.2).

2.2.5 Growth theories

One of the key questions in economics is what causes growth. To address this question, many growth theories have been developed over the years. However, not all the theories attribute growth to the same factors.

In the late 1950s and early 1960s, growth theory was dominated by the Neo-classical model. The Neoclassical growth model, also known as the exogenous growth model and Solow growth model was developed by R. Solow and T. Swan (1956). According to this model, an economy grows overtime due to investment which adds to capital stock, population growth, technological progress and advances in productivity.

The Cobb-Douglas production function is used to illustrate the workings of the Solow-Swan growth model as shown:

Y = AKαL1-α (1)

Where:

Y: Output

A: Level of technology

K: Capital

L: Labor

α: Production elasticity

The main assumptions underlying this model are constant return to scale, diminishing marginal returns to each input, exogenous production technology and the substitutability of labour and capital.

Re-writing equation (1) in intensive form (dividing by AL):

= y =f

Where:

y: output-effective labour ratio

k: capital-effective labour ratio

In the neoclassical model, saving which determines the level of investment influences the capital stock in the economy. Therefore, any outflows of capital from the economy will affect savings and hence investment in the domestic economy. It is also important to take into account the level of investment required. Consequently, the net change in capital per capita, is the excess savings () over required investment (k) as shown below:

k

The steady state equilibrium for the economy is the combination of per capita GDP and per capita capital where the economy will remain at rest, that is, where per capita economic variables are no longer changing, Therefore, the steady state is defined by =0 and occurs at the values of y* and k*satisfying:

= s= k*

The steady state can be derived as shown below given the production function, the saving function and the capital widening line.

Output-effective labour ratio

Capital-effective labour ratio

fdfsdsdsdfdsdratioratio

From the diagram, the initial steady state is reached at k*, where saving and capital widening lines intersect each other. At this point, the output-effective labour ratio and the capital effective labour ratio are constant. To the left of k*, the capital stock is rising ( and on the right hand side of k*, the capital stock is falling (. An increase in saving rate causes an upward shift of the saving schedule to the dashed schedule,.

Initially, the steady state equilibrium is at point C. Assume, saving has risen relative to the investment required; as a consequence more is saved that is required to maintain capital per head constant. Thus, the capital stock per head will keep rising until it reaches point C’. At such a point both capital and output per head have risen. However, at point C’ the economy has returned to its steady state growth rate.

Under the neoclassical model, the major factors that contribute to growth are technical progress, population growth and capital accumulation. However, a large portion growth is left unexplained and is represented in the residual – the ‘Solow Residual’. In fact, the neoclassical model has been widely criticized on the grounds that it leaves the main factors that affect growth unexplained. It is worth pointing out that an increase in saving rate will in the long run raise only the level of output and capital per head and not the growth rate of output per head. Also, the assumption of perfect competition does not hold in the real world. Hence, the endogenous growth model tries to remedy the situation.

In the mid 1980s, the Endogenous, also known as the New Growth Theory was developed. Researchers such as Romer (1986), Lucas (1988), and Rebelo (1991) pioneered this theory. The endogenous theory seeks to provide the missing explanation of the long run growth in the neoclassical theory by providing a theory of technical progress. The production function below is used:

Y= AK

Where:

Y is output, A represents the factors affecting technical progress and K includes both human and physical capital.

The main assumptions underlying this production function are increasing returns to scale and constant returns to capital. The endogenous theory also holds that policy measures can have an impact on the long run growth rate of an economy. The long term growth rate relies on governmental actions, such as taxation, infrastructure services and financial markets (Barro 1996, p.8). Thus, capital flight which occurs through these measures as discussed above, will impact the long run growth of the economy.

Therefore, Endogenous growth theorists believe that capital flight is a crucial determinant of growth.

2.3 Empirical aspect

Several authors have tried to shed light on factors affecting capital flight and its impact on economic growth. This section therefore points out the empirical results of some studies on capital flight.

Although there had been massive determinants of capital flight, mainly because of differences in its measurement and differences in econometric techniques and specifications, some factors have become more obvious as its determinants. The key results from a selection of 17 studies on developing nations have been reviewed as shown in Table 1. (Kindly refer to Appendix I).

Further empirical evidences on the most common determinants of capital flight, as per the table, are set out below:-

A study by Ndikumana and Boyce (2008) shows that external debts encourage capital flight. Firstly, OLS estimation was used followed by adding country specific effects and lastly by taking into account change in debt as endogenous. The results show a statistically and economically positive relationship between external borrowing and capital flight. It was found that between 1970 and 2004, 62 cents out of each dollar borrowed abroad has left sub-Saharan Africa in the form of capital flight. Earlier empirical evidence by Ndikumana and Boyce (2003) approved the above statement. An econometric analysis was carried from 30 sub-Saharan Africa countries for the period 1970 to 1996. The result showed that 80 cents out of each dollar of external borrowing escape the countries in terms of capital outflow in the same year.

An investigation was carried out by Victor (2007) on a panel data of 77 countries from 1971 to 2000 in order to test whether inflation increases annual post-war capital flight. Using different methods of measuring capital flight and many econometric estimation techniques, evidence suggest that 1% increase in inflation is accompanied by 0.005% to 0.01 % of GDP increase in capital flight. In another study, Ayadi (2008) used the ordinary least squared (OLS) and the error correction method (ECM) to examine the determinants of capital flight in Nigeria. It was found that exchange rate significantly explains capital flight in the long run.

On the other hand, a pooled cross-section analysis based on the fixed effects model was used by Červená (2006) to look at the impact of capital flight on economic growth for the period 1994 to 2003. Results from grouping all countries (Asia, Latin America, Africa and Europe and Central Asia) indicate that a 1% rise in capital flight reduces the growth of GDP per capita by around 3%. Furthermore, it was found that Asian countries were the most affected with a fall in their growth rate by 9% due to a 1 % increase in capital flight. In the same stream, it was argued by Gusarova (2009) that a 1% increase in capital flight caused a fall in the economic growth by 0.14%. The difference in the result of Červená & Gusarova can be attributed to the fact that the countries considered were not the same and the period considered also had a wide gap (year 1994 to 2003 for Červená and year 2002 to 2006 for Gusarova).

On the other hand, Saheed and Ayodeji (2012) pointed out that capital flight has a positive, though weak, relationship with economic growth in Nigeria. The OLS (Ordinary Least Square) estimation technique was used for the period 1981 to 2007 and it can be concluded that a 1% change in capital flight increases economic growth by 0.094%. This positive effect is probably due to the fact that capital flight in Nigeria returns back in the form of industrial or capital goods used in the domestic production.

Hence, various studies have examined the impact of several factors on capital flight and in turn, the effect of capital flight on economic growth. It can be seen from the above that there is an ambiguous relationship between capital flight and economic growth. Thus, this study will shed some more light on this relationship.